subject: The Different Types Of Mortgages [print this page] Last month we went over how mortgage payments work and highlighted important terms first time Canadian home buyers should familiarize themselves with. We covered the difference between the down payment and monthly payments. Specializing in arranging mortgages in Mississauga and the GTA, Ive decided to continue sharing what I know to try and help Ontarians in the market for a new home.
With the economy as it is, its important for Canadians to have a full understanding of what types of mortgage plans are available to them. Thats what were here for. Since setting up a mortgage can be a complicated process, its comforting to have one of our certified mortgage brokers there to help you through the process. At Mississauga Mortgage, we have the mortgage agents and the professional experience to find the right mortgage rates and terms to suit your lifestyle.
So what are the different types of mortgages available? The two simplest and most popular distinctions of mortgages are: The Fixed-Rate Mortgage (FRM) and the Adjustable-Rate Mortgage (ARM).
The Fixed-Rate Mortgage
In an FRM, interest rates never change over the lifespan of the loan. What this means is that the monthly payment will always be the same the only numbers that may fluctuate are the property taxes and insurance charges.
Common lifespans of the FRM:
30 years: A mortgage spanning 30 years will pay the most interest, but remember that this interest is tax-deductible.
20 years: A shorter term means lower interest but higher payments. Shortening the lifespan of the loan also means the principal can be paid back quicker, making it easier to build up equity.
15 years: A 15 year loan offers the same benefits of a 20 year loan, but with higher mortgage rates.
The obvious benefit of opting for an FRM is long-term stability. The reciprocated drawback, however, is long-term commitment. Our mortgage agents can help you understand if an FRM is right for you.
Adjustable-Rate Mortgage
In an ARM, the interest rates are recalculated at preset intervals to reflect changing market conditions. The initial interest rate is usually lower than the FRM, but its up to the market to decide where it goes from there. Conventional ARMs adjust once a year, but there are also 6 month ARMs, 2 year ARMs, etc.
Hybrid ARMs
There are also Hybrid ARMs like the 5/1 year plan. In this type of mortgage, the interest rates are fixed for the first 5 years before reverting to an adjustable state for the rest of the loans lifespan. Another common Hybrid ARM is the 3/3 interest rates are fixed for the first 3 years, and then adjust every 3 years afterwards.
Caps
Depending on your mortgage agreement, there will be limits to how high the interest rate can climb over the life of the loan. Interim or periodic caps determine how much the interest rate can change with each adjustment. This is a very important part of an ARM, so we recommend having an experienced mortgage broker go over the fine print with you.
